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Since 1990, GAO has designated the Department of Defense's (DOD) inventory management as a high-risk area. It is critical that the military services and the Defense Logistics Agency effectively and efficiently manage DOD's secondary inventory to ensure that the warfighter is supplied with the right items at the right time. It is also imperative that they maintain good stewardship over the billions of dollars invested in their inventory. GAO reviewed the Navy's management of secondary inventory and determined (1) the extent to which on-hand and on-order secondary inventory reflected the amount needed to support current requirements and (2) causes for the Navy's having secondary inventory in excess of current requirements or, conversely, for having inventory deficits. To address these objectives, GAO analyzed Navy secondary inventory data (spare parts such as aircraft and ship engines and their components and accessories) from fiscal years 2004 through 2007.

For the 4-year period GAOexamined, the Navy had significantly more inventory than was needed to support current requirements. The Navy also experienced some inventory deficits, though to a far lesser extent. GAO's analysis of inventory data identified an annual average of about $18.7 billion of Navy secondary inventory for fiscal years 2004 to 2007, of which about $7.5 billion (40 percent) exceeded current requirements. About half of the $7.5 billion of inventory exceeding current requirements was retained to meet anticipated future demands, and the remainder was retained for other reasons or identified as potential excess. Based on Navy demand forecasts, inventory that exceeded current requirements was sufficient to satisfy several years, or even decades, of anticipated supply needs. Also, a large proportion of items that exceeded current requirements had no projected demand. The Navy also had an annual average of about $570 million of inventory deficits over this 4-year period. Some items experienced persistent deficits for the 4 years covered in GAO's review. Navy inventory did not align with current requirements over this 4-year period because (1) the Navy has not established the cost efficiency of its inventory management, (2) its demand forecasting effectiveness is limited and requirements for items may change frequently after purchase decisions are made, and (3) it has not adjusted certain inventory management practices in response to the unpredictability in demand. As a result, the Navy had billions of dollars in excess inventory against current requirements each year. DOD's supply chain management regulation requires the military services to take several steps to provide for effective and efficient end-to-end materiel support. For example, the regulation directs the components to size secondary item inventories to minimize DOD investment while providing the inventory needed. However, while the Navy has performance measures related to meeting warfighter needs, it lacks metrics and targets for tracking and assessing the cost efficiency of its inventory management. In addition, although Navy managers most frequently attributed the accumulation and retention of inventory exceeding current requirements to changes in demand, the Navy has not systematically evaluated the effectiveness of its demand forecasting. Problems with demand forecasting that contribute to excess inventory include incomplete and inaccurate data and a lack of communication and coordination among key personnel. Finally, the Navy has not adjusted certain management practices--in areas such as initial provisioning, modifying purchase decisions for inventory that is on order and not yet in its possession, and retention--to provide flexibility for responding to changes in demand. First, initial provisioning of spare parts based on engineering estimates can result in the purchase of unneeded stock when these estimates prove to be inaccurate. Second, the Navy's management practices for on-order items limit flexibility in modifying purchase decisions in cases where demand has changed. Third, although prior studies have identified weaknesses in inventory retention practices, the Navy has not implemented recommended corrective actions. Also, the Navy's designation of new chief and deputy chief management officer positions provides an opportunity for enhanced oversight of inventory management improvement efforts. Strengthening the Navy's inventory management--while maintaining high levels of supply availability and meeting warfighter needs--could reduce support costs and free up funds for other needs.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: The Navy Supply Systems Command in May 2009 issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009-June 2010 period as part of an annual report on management internal controls for inventory management. Furthermore, this area is being addressed across the department by the Comprehensive Inventory Management Improvement Plan, which is scheduled to be completed in fiscal year 2015. These actions improve the Navy's management practices that in the past have contributed to excess levels of inventory.

Recommendation: To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to ensure that required annual reviews validating methodologies used for making retention decisions are performed and documented.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: Based on our recommendation, to improve its initial provisioning, the Navy Supply Systems Command sponsored a study in 2010 which confirmed forecasting challenges with initial provisioning. Additionally, the Navy updated policy concerning initial provisioning and revised how its supply support requests, which support initial provisioning, should be processed and funded. The Navy completed an analysis of supply support requests with DLA, which resulted in more intense focus on supply support request policy and guidance. To further improve initial provisioning, the Navy established a demand forecasting metric. With respect to on-order management, the Navy has issued guidance in 2011, in accordance with the revised DOD guidance on on-order management. For retention management, the Navy Supply Systems Command issued guidance requiring annual reviews to validate methodologies used for making retention decisions, and the Commander, Naval Inventory Control Point, certified the reviews were completed for the July 2009 - June 2010 period as part of an annual report on management internal controls for inventory management. Combined, the actions taken will help improve the Navy's initial provisioning management, on order management, and its retention management.

Recommendation: To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to revise inventory management practices to incorporate the flexibility needed to minimize the impact of demand fluctuations. Specific attention should be given to revising practices regarding initial provisioning management, on-order management, and retention management. Further, the Commander, Naval Supply Systems Command, and the Commander, Naval Inventory Control Point, should develop an evaluation plan and interim milestones for assessing the impact of ongoing efforts and take additional corrective actions, if warranted, to incorporate flexibility into inventory management practices.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In 2010, the Naval Inventory Control Point developed a demand forecast metric using the enterprise resource planning data that considers variable lead-time. The metric, once fully implemented, will enable the identification of areas where forecasts have been consistently inaccurate, and the correction of any systemic weaknesses in forecasting procedures. In addition, DOD's Comprehensive Inventory Management Improvement Plan includes a demand forecasting sub-plan that serves as the action plan for OSD, the services, and DLA for improving demand forecasting through fiscal year 2015. The plan includes goals, objectives, timeframes, and the development of metrics for tracking forecasting error and bias department-wide. OSD, the services, and DLA are working to establish a demand forecasting metric, which was recommended in a study conducted by the Logistics Management Institute.

Recommendation: To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to evaluate demand forecasting procedures to identify areas where forecasts have been consistently inaccurate, correct any systemic weaknesses in forecasting procedures, and improve communications among stakeholders, to include promptly relaying changes in programs and other decisions that affect purchases of spare parts. Further, the Commander, Naval Supply Systems Command, and the Commander, Naval Inventory Control Point, should develop an evaluation plan and interim milestones for assessing the impact of ongoing efforts and take additional corrective actions, if warranted, to improve demand forecasting for secondary inventory.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: The Navy has established a cost-efficiency metric--the materiel replacement rate--that tracks the rate at which obligation authority is being used to replenish inventory levels. It is a predictive measure of Navy Working Capital Fund inventory build-up or sell-down. A materiel replacement rate above 100 percent means the Navy's inventory is expanding while a rate below 100 percent means the Navy's inventory is decreasing. Additionally, OSD, the services, and DLA are also working to establish a set of department-wide cost-efficiency metrics as part of the implementation of the Comprehensive Inventory Management Plan.

Recommendation: To improve the management of the Navy's secondary inventory, the Secretary of Defense should direct the Secretary of the Navy, in conjunction with the Commander, Navy Supply Systems Command, and the Commander, Naval Inventory Control Point, to establish metrics and goals for tracking and assessing the cost efficiency of inventory management and incorporate these into existing management and oversight processes.

Agency Affected: Department of Defense

Status: Closed - Not Implemented

Comments: The Navy CMO and DCMO offices were unable to provide any evidence of oversight.

Recommendation: The Secretary of the Navy should direct that the Navy's Chief Management Officer and Deputy Chief Management Officer exercise appropriate oversight of Navy inventory management improvement to align improvement efforts with overall business transformation and to reduce support costs.